INDIRECT
COSTS CLAIMED BY
THE NEW MEXICO DISABILITY
DETERMINATION SERVICES

September
2009

A-06-09-19122

AUDIT
REPORT

Mission

By conducting independent and objective audits, evaluations and investigations,
we inspire public confidence in the integrity and security of SSA's programs
and operations and protect them against fraud, waste and abuse. We provide timely,
useful and reliable information and advice to Administration officials, Congress
and the public.

Authority

The Inspector General Act created independent audit and investigative units,
called the Office of Inspector General (OIG). The mission of the OIG, as spelled
out in the Act, is to:

Conduct and supervise independent and objective audits and investigations
relating to agency programs and operations.
Promote economy, effectiveness, and efficiency within the agency.
Prevent and detect fraud, waste, and abuse in agency programs and operations.
Review and make recommendations regarding existing and proposed legislation
and regulations relating to agency programs and operations.
Keep the agency head and the Congress fully and currently informed of problems
in agency programs and operations.

To ensure objectivity, the IG Act empowers the IG with:

Independence to determine what reviews to perform.
Access to all information necessary for the reviews.
Authority to publish findings and recommendations based on the reviews.

Vision

We strive for continual improvement in SSA's programs, operations and management
by proactively seeking new ways to prevent and deter fraud, waste and abuse.
We commit to integrity and excellence by supporting an environment that provides
a valuable public service while encouraging employee development and retention
and fostering diversity and innovation.

Our objective was to determine whether the indirect costs claimed by the New
Mexico Disability Determination Services (NM-DDS) for Federal Fiscal Years (FY)
2007 and 2008 were allowable and properly allocated.

BACKGROUND

The Disability Insurance (DI) program, established under Title II of the Social
Security Act (Act), provides benefits to wage earners and their families in
the event the wage earner becomes disabled. The Supplemental Security Income
(SSI) program, established under Title XVI of the Act, provides benefits to
financially needy individuals who are aged, blind, and/or disabled.

The Social Security Administration (SSA) is responsible for implementing policies
for the development of claims under the DI and SSI programs. Disability determinations
under both DI and SSI are performed by disability determination services (DDS)
in each State or other responsible jurisdiction, in accordance with Federal
regulations. In carrying out its obligation, each DDS is responsible for determining
claimants' disabilities and ensuring adequate evidence is available to support
its determinations. SSA reimburses the DDS for 100 percent of allowable expenditures
up to its approved funding authorization. The expenditures include both direct
and indirect costs. At the end of each quarter of the FY, each DDS submits a
Form SSA-4513, State Agency Report of Obligations for SSA Disability Programs,
to account for program disbursements and unliquidated obligations.

The New Mexico Division of Vocational Rehabilitation (NM-DVR) serves as NM-DDS'
parent agency. NM-DVR provides NM-DDS with various administrative services,
such as accounting and procurement. Costs associated with these services are
called indirect costs. Federally assisted programs bear their fair share of
indirect costs except where restricted or prohibited by law. Federal cost standards
state that expenditures may be allocated to a particular cost objective if the
goods or services are charged in accordance with the relative benefits received.
Each year, NM-DVR prepares and submits an indirect cost rate proposal to the
U.S. Department of Education, the cognizant Federal agency, for approval. The
indirect cost rate proposal is prepared based on the actual costs incurred 2
FYs prior. For example, the FY 2007 proposal was prepared based on actual costs
from FY 2005. At the request of the cognizant agency, NM-DVR uses the "simplified
or single rate method" in formulating the indirect cost rate. Federal cost
standards allow use of this method whenever a governmental grantee has only
one major function encompassing a number of individual projects or activities
that benefit from its indirect costs to approximately the same degree.

NM-DVR allocates indirect costs aggregated in indirect pools to three of its
programs: Rehabilitation Services, Special Programs (Program Development and
Support), and DDS. The indirect costs consist of services provided by the Assistant
Secretary for Vocational Rehabilitation, the Administrative Services division,
and the Information Services division. The indirect cost rate is then derived
by dividing the indirect cost pool total by the total direct base (direct costs
of the Rehabilitation Services, Program Development and Support, and DDS). See
Appendix B for our audit scope and methodology and Appendix C for information
on NM-DVR's organizational structure.

Indirect costs claimed for reimbursement under SSA's disability programs were
generally allowable for FYs 2007 and 2008 and paid in accordance with the cost
rates approved by the cognizant agency. In most instances, NM-DVR's use of the
single rate method to allocate indirect costs was appropriate because it appeared
NM-DDS benefited from the related services to the same degree as Rehabilitation
Services and Special Programs.

However, based on discussions with NM-DVR and NM-DDS personnel and review of
available information, use of the single rate method resulted in excessive Information
Services, General Expenditures and Procurement, and Human Resources cost allocations
to NM-DDS relative to the benefits actually received.

NM-DVR implemented the single rate method at the direction of the cognizant
agency. However, basic application of this allocation method was not appropriate
in these three instances because NM-DDS did not benefit from these cost pools
to the same degree as the other NM-DVR divisions. For FYs 2007 and 2008, SSA
reimbursed NM-DVR just over $1 million for indirect costs related to these three
cost pools. NM-DVR personnel stated that a lack of sufficient staffing prevented
them from considering an alternative method of allocating these costs. Adjusting
the allocation methodology to reflect that NM-DDS did not benefit from these
services to the same degree as the other NM-DVR programs would have resulted
in a reduction to the approximately $1 million in indirect cost reimbursements
paid by SSA. As long as NM-DVR continues to use the single rate method to allocate
Information Services, General Expenditures and Procurement, and Human Resources
costs and does not adjust the cost pool amounts downward to reflect the actual
level of support provided, excessive indirect costs will continue to be allocated
to NM-DDS.

INFORMATION SERVICES COSTS

The Information Services cost pool supports NM-DVR by developing and maintaining
information technology systems; providing email service to its programs; storing
information; backing up financial, payroll, and training databases; and providing
support for interfaces between NM-DVR and the Department of Finance and Administration
financial system. NM-DVR allocated Information Services costs to three of its
programs based on a percentage of their total direct costs, resulting in NM-DDS
indirect cost allocations totaling $593,922 for FYs 2007 and 2008. Federal cost
standards state this method of allocation is appropriate only if activities
benefit from the indirect expenditures to approximately the same degree. However,
NM-DDS did not benefit from Information Services expenditures to the same degree
as the other two NM-DVR programs. Illustrations of how support provided to the
NM-DDS differed from the other NM-DVR programs follow.

SSA purchases the computer equipment and software NM-DDS uses. This equipment
interfaces with SSA's systems. Because of the sensitivity of information accessible
through SSA's systems, the software installed on NM-DDS computers contains an
electronic firewall that restricts access to or from NM-DVR computer systems.
As a result, NM-DDS has limited access to NM-DVR financial systems and training
modules.

NM-DDS employs two full-time information technology support staff whose salaries
are included in direct costs already reimbursed by SSA. Their responsibilities
include keeping NM-DDS computer systems running and updated, maintaining the
network and workstations, and maintaining the mainframe and printers.

SSA provides NM-DDS computer systems with both email access and Internet service.
The Information Services indirect cost pool includes charges for these same
services, which are neither available to nor accessible by NM-DDS because of
the SSA firewall.

Based on the level of support Information Services actually provided, use of
the single rate method resulted in excessive indirect cost allocations to the
NM-DDS.

GENERAL EXPENDITURES AND PROCUREMENT COSTS

The General Expenditures and Procurement cost pool captures costs incurred
by
NM-DVR to provide guidance and consultation concerning building leases, develop
specifications for new buildings or new office locations, coordinate and manage
vehicle leases with the State's General Services Department, and coordinate
leases of telecommunications and photocopying equipment. Additionally, NM-DVR
provides guidance and consultation on procurement of goods and services. NM-DVR
allocated General Expenditures and Procurement costs to its three programs based
on a percentage of their total direct costs, resulting in NM-DDS indirect cost
allocations totaling $314,661 for FYs 2007 and 2008. However, NM-DDS did not
benefit from General Expenditures and Procurement costs to the same degree as
the other two
NM-DVR programs.

For example, NM-DDS had not leased a vehicle from the State in 3 years. Further,
NM-DDS employees, whose salaries and benefits are fully funded by SSA, initiate
and administer the procurement of goods and services for a majority of the items
they require. Once goods have been procured, NM-DDS provides information to
the parent agency for administrative review and processing through the State
system. Based on the level of support General Expenditures and Procurement actually
provided, use of the single rate method resulted in excessive allocations to
NM-DDS.

HUMAN RESOURCE COSTS

The Human Resource cost pool consists of NM-DVR expenditures for training new
employees, conducting the "Rehab Academy" (for developing NM-DVR counselors
and technicians) and overseeing the education assistance program and budget.
The education assistance program pays for State employees to complete bachelor's
and, in some instances, master's degrees. Once employees get their degrees,
they become eligible for counselor positions. NM-DVR allocated Human Resource
costs to its three programs based on a percentage of their total direct costs,
resulting in NM-DDS indirect cost allocations totaling $127,999 for FYs 2007
and 2008. However, NM-DDS did not benefit from Human Resource expenditures to
the same degree as the other two
NM-DVR programs.

Discussions with NM-DDS staff indicated that most training provided to NM-DDS
personnel is either obtained on-line, via the SSA-provided Internet, or purchased
directly by NM-DDS. SSA fully reimburses these costs. According to NM-DDS staff,
most of the training available to NM-DVR employees and staff through the NM-DVR
Intranet is not relevant to DDS operations, and most training modules are not
available for NM-DDS access because of SSA firewall restrictions. The Staff
Coordinator stated that the training provided to NM-DDS employees consists of
a new employee orientation, safety training, violence prevention training, and
employment discrimination training. There are no other services provided to
NM-DDS, and there is minimal communication with the Staff Coordinator. Finally,
SSA receives no benefit from the State's education assistance program. These
expenditures provide college degrees exclusively for Rehabilitative Services
counselors and should not be allocated to NM-DDS. Based on the level of support
actually provided, use of the single rate method to allocate Human Resources
costs resulted in excessive allocations to NM-DDS.

CONCLUSION AND RECOMMENDATION

Indirect costs claimed for reimbursement under SSA's disability programs were
generally allowable and paid in accordance with the cost rates approved by the
cognizant agency. However, NM-DVR allocated costs to NM-DDS from three indirect
cost pools in amounts that were not equitable considering the relative benefit
received. NM-DVR used the single rate method to allocate these costs and did
not make any adjustments to reflect that many of the services provided by Information
Services, General Expenditures and Procurement, and Human Resources were either
already provided by SSA or were not used by NM-DDS. NM-DDS will continue to
receive excess indirect cost allocations as long as NM-DVR continues to allocate
these indirect cost pools using an unadjusted single rate method.

We recommend that SSA ensure NM-DDS bears no more than its fair share of indirect
costs by working with NM-DVR and the cognizant agency to develop and implement
a methodology that allows for downward adjustments to Information Services,
General Expenditures and Procurement, and Human Resources indirect cost pool
amounts to reflect the actual degree of support provided to NM-DDS.

SSA COMMENTS

SSA agreed with our recommendation and will work with NM-DDS and NM-DVR to
develop more reasonable cost sharing methods. See Appendix D for the full text
of the Agency's comments.

NM-DVR COMMENTS

NM-DVR agreed that NM-DDS should bear no more than its fair share of indirect
costs and stands ready to work with both SSA and the cognizant agency. NM-DVR
provided several observations indicating disagreement with information presented
in the report. See Appendix E for the full text of NM-DVR's comments.

OIG RESPONSE

We appreciate the comments from SSA and NM-DVR. We are encouraged that both
parties indicate willingness to work together to ensure NM-DDS bears no more
than its fair share of indirect costs. NM-DVR stated its belief that information
in the report was inaccurate or unsubstantiated. NM-DVR stated it was provided
no interview protocol and no opportunity to clarify statements made. During
the audit, we interviewed several NM-DVR and NM-DDS officials including the
NM-DVR Director, Chief Information Officer, Human Resources Manager, Staff Development
Coordinator, Administrative Operations Manager, and the NM-DDS Administrator.
Information obtained during interviews with management and staff was to help
us understand the cost allocation documentation provided. The interviews were
not a significant factor in formulating our conclusion. Other factors included
available financial data and indirect cost pool documentation obtained during
the audit.

The NM-DVR stated that costs for Rehabilitation Services Unit staff to obtain
degrees were removed from the indirect cost pool. We learned about the degree
program while discussing the Human Resources indirect cost pool with the NM-DVR
Staff Development Coordinator. Unlike the other NM-DVR components, SSA pays
the costs of most training provided to NM-DDS employees and receives no benefit
from either the Rehab Academy or the education assistance program, both managed
by Human Resources (now referred to as the Staff Development Unit).

NM-DVR stated the report did not completely portray the Information Services
support it provides to NM-DDS. NM-DVR also stated the Information Services provides/maintains
several email groups for NM-DDS as well as an interface with the State Financial
System. NM-DVR further stated it is providing the NM-DDS a separate network
connection in its Albuquerque facility for use by visiting NM-DVR employees
and maintains an employee Website where NM-DDS employees can access on-line
training. We appreciate the technological support Information Services provides
the NM-DDS. However, we believe the costs associated with providing these items
is a relatively small portion of the more than $2.2 million charged to the Information
Services cost pool. Further, the costs associated with the current installation
of a network connection in the NM-DDS have no bearing on the FY 2005 and FY
2006 actual costs used in determining the FY 2007 and 2008 indirect cost rates.

We reviewed the indirect costs reported by the New Mexico Division of Vocational
Rehabilitation (NM-DVR) and its component, the New Mexico Disability Determination
Services (NM-DDS) on its State Agency Report of Obligations for SSA Disability
Programs (Form SSA-4513) for Federal Fiscal Years (FY) 2007 and 2008. We reviewed
NM-DVR and NM-DDS' compliance with applicable laws and regulations over the
allowability of indirect costs.

To accomplish our objectives, we:

Reviewed Office of Management and Budget Circular A-87, Cost Principles for
State, Local, and Indian Tribal Governments, the Code of Federal Regulations,
United States Code, the Social Security Administration's (SSA) Program Operations
Manual System, and NM-DDS Cost Allocation Plan.

Interviewed employees from SSA, NM-DVR, and NM-DDS.

Examined the indirect costs incurred and claimed by NM-DVR.

Reviewed the supporting documentation used to formulate the allocation methodology
used to distribute costs to the NM-DVR.

Reviewed workpapers and source documentation used in preparing the indirect
cost proposal for FYs 2007 and 2008.

Compared the description of services provided by NM-DVR to the services received
by NM-DDS.

Reviewed Forms SSA-4513 for FYs 2007 and 2008

We tested the data obtained for our audit and determined they were sufficiently
reliable to meet our objective. We conducted this performance audit in accordance
with generally accepted government auditing standards. Those standards require
that we plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives. We performed
our audit from January through June 2009 at the NM-DVR in Santa Fe, New Mexico;
NM-DDS in Albuquerque, New Mexico; and SSA regional office in Dallas, Texas.

Appendix C
Organization Chart

New Mexico Division of Vocational Rehabilitation
Organization Chart

There are five programs under the Assistant Secretary - Division of Vocational
Rehabilitation (NM-DVR). In calculating the indirect cost rate, NM-DVR divides
the indirect costs of the Assistant Secretary - Division of Vocational Rehabilitation,
Deputy Director - Administrative Services, and Deputy Director - Information
Services & CIO by the total direct costs of the Deputy Director - Rehabilitation
Services, Deputy Director - Special Programs (Program Development and Support),
and Deputy Director - Disability Determination Services. This becomes the indirect
cost rate that is applied to the New Mexico Disability Determination Services.

The NM-DVR uses the "simplified, or single rate method" in formulating
the indirect cost rate. This method is allowable whenever a governmental grantee
has only one major function encompassing a number of individual projects or
activities that benefit from its indirect costs to approximately the same degree.

We appreciate the opportunity to comment on the Signed Formal Draft Report
(A-06-09-19122), Indirect Costs Claimed by the New Mexico Disability Determination
Services. We would like to thank the OIG Audit staff in the Dallas Region for
the excellent manner in which they organized and performed this audit. We appreciate
their efforts to keep all parties informed of their progress during the audit.

Our response to the recommendation contained in the narrative report follows:

OIG Recommendation: We recommend that SSA ensure the New Mexico Disability
Determination Services (NM-DDS) bears no more than its fair share of indirect
costs by working with the New Mexico Division of Vocational Rehabilitation (NM-DVR)
and the cognizant agency to develop and implement a methodology that allows
for downward adjustments to Information Services, General Expenditures and Procurement,
and Human Resources indirect cost pool amounts to reflect the actual degree
of support provided to NM-DDS.

Response: We agree that these cost pools require further analysis and justification.
We will work with the New Mexico DDS and DVR to develop more reasonable cost
sharing methods.

If members of your staff have any questions, please have them call Irving Wilkerson
or Roberta Irwin at 214-767-4281 in Management and Operations Support, Center
for Disability.

For additional copies of this report, please visit our web site at www.ssa.gov/oig
or contact the Office of the Inspector General's Public Affairs Staff Assistant
at
(410) 965-4518. Refer to Common Identification Number A-06-09-19122.

Overview of the Office of the Inspector General
The Office of the Inspector General (OIG) is comprised of an Office of Audit
(OA), Office of Investigations (OI), Office of the Counsel to the Inspector
General (OCIG), Office of External Relations (OER), and Office of Technology
and Resource Management (OTRM). To ensure compliance with policies and procedures,
internal controls, and professional standards, the OIG also has a comprehensive
Professional Responsibility and Quality Assurance program.

Office of Audit
OA conducts financial and performance audits of the Social Security Administration's
(SSA) programs and operations and makes recommendations to ensure program objectives
are achieved effectively and efficiently. Financial audits assess whether SSA's
financial statements fairly present SSA's financial position, results of operations,
and cash flow. Performance audits review the economy, efficiency, and effectiveness
of SSA's programs and operations. OA also conducts short-term management reviews
and program evaluations on issues of concern to SSA, Congress, and the general
public.

Office of Investigations
OI conducts investigations related to fraud, waste, abuse, and mismanagement
in SSA programs and operations. This includes wrongdoing by applicants, beneficiaries,
contractors, third parties, or SSA employees performing their official duties.
This office serves as liaison to the Department of Justice on all matters relating
to the investigation of SSA programs and personnel. OI also conducts joint investigations
with other Federal, State, and local law enforcement agencies.

Office of the Counsel to the Inspector General
OCIG provides independent legal advice and counsel to the IG on various matters,
including statutes, regulations, legislation, and policy directives. OCIG also
advises the IG on investigative procedures and techniques, as well as on legal
implications and conclusions to be drawn from audit and investigative material.
Also, OCIG administers the Civil Monetary Penalty program.

Office of External Relations
OER manages OIG's external and public affairs programs, and serves as the principal
advisor on news releases and in providing information to the various news reporting
services. OER develops OIG's media and public information policies, directs
OIG's external and public affairs programs, and serves as the primary contact
for those seeking information about OIG. OER prepares OIG publications, speeches,
and presentations to internal and external organizations, and responds to Congressional
correspondence.

Office of Technology and Resource Management
OTRM supports OIG by providing information management and systems security.
OTRM also coordinates OIG's budget, procurement, telecommunications, facilities,
and human resources. In addition, OTRM is the focal point for OIG's strategic
planning function, and the development and monitoring of performance measures.
In addition, OTRM receives and assigns for action allegations of criminal and
administrative violations of Social Security laws, identifies fugitives receiving
benefit payments from SSA, and provides technological assistance to investigations.